In an almost annual ritual, Congress is letting a package of 55 popular tax breaks expire at the end of the year, creating uncertainty — once again — for millions of individuals and businesses.
Lawmakers let these tax breaks lapse almost every year, even though they save businesses and individuals billions of dollars. And almost every year, Congress eventually renews them, retroactively, so taxpayers can claim them by the time they file their tax returns.
No harm, no foul, right? After all, taxpayers filing returns in the spring won’t be hurt because the tax breaks were in effect for 2013. Taxpayers won’t be hit until 2015, when they file tax returns for next year.
Not so far. Trade groups and tax experts complain that Congress is making it impossible for businesses and individuals to plan for the future. What if lawmakers don’t renew the tax break you depend on? Or what if they change it and you’re no longer eligible?
“It’s a totally ridiculous way to run our tax system,” said Rachelle Bernstein, vice president and tax counsel for the National Retail Federation. “It’s impossible to plan when every year this happens, but yet business has gotten used to that.”
Some of the tax breaks are big, including billions in credits for companies that invest in research and development, generous exemptions for financial institutions doing business overseas, and several breaks that let businesses write off capital investments faster.
Others are more obscure, the benefits targeted to film producers, race track owners, makers of electric motorcycles and teachers who buy classroom supplies with their own money.
There are tax rebates to Puerto Rico and the Virgin Islands from a tax on rum imported into the United States, and a credit for expenses related to railroad track maintenance.
A deduction for state and local sales taxes benefits people who live in the nine states without state income taxes. Smaller tax breaks benefit college students and commuters who use public transportation.
A series of tax breaks promote renewable energy, including a credit for power companies that produce electricity with windmills.
The annual practice of letting these tax breaks expire is a symptom a divided, dysfunctional Congress that struggles to pass routine legislation, said Rep. John Lewis of Georgia, a senior Democrat on the tax-writing House Ways and Means Committee.
“It’s not fair, it’s very hard, it’s very difficult for a business person, a company, to plan, not just for the short term but to do long-term planning,” Lewis said. “It’s shameful.”
With Congress on vacation until January, there is no chance the tax breaks will be renewed before they expire. And there is plenty of precedent for Congress to let them expire for months without addressing them. Most recently, they expired at the end of 2011, and Congress didn’t renew them for the entire year, waiting until New Year’s Day 2013 — just in time for taxpayers to claim them on their 2012 returns.
But Congress only renewed the package though the end of 2013.
Why such a short extension? Washington accounting is partly to blame. The two-year extension Congress passed in January cost $76 billion in reduced revenue for the government, according to the nonpartisan Joint Committee on Taxation. Making those tax breaks permanent could add $400 billion or more to the deficit over the next decade.
With budget deficits already high, many in Congress are reluctant to vote for a bill that would add so much red ink. So, they do it slowly, one or two years at time.
“More cynically, some people say, if you just put it in for a year or two, then that keeps the lobbyists having to come back and wine-and-dine the congressmen to get it extended again, and maybe make some campaign contributions,” said Mark Luscombe, principal tax analyst for CCH, a consulting firm based in Riverwoods, Ill.
This year, the package of tax breaks has been caught up in a debate about overhauling the entire tax code. The two top tax writers in Congress — House Ways and Means Committee Chairman Dave Camp, R-Mich., and Senate Finance Committee Chairman Max Baucus, D-Mont. — have been pushing to simplify the tax code by reducing tax breaks and using the additional revenue to lower overall tax rates.
But their efforts have yet to bear fruit, leaving both tax reform and the package of temporary breaks in limbo. When asked how businesses should prepare, given the uncertainty, Camp said, “They need to get on board with tax reform, that’s what they need to do.”
Further complicating the issue, President Barack Obama has nominated Baucus to become U.S. ambassador to China, meaning he will soon leave the Senate, if he is confirmed by his colleagues.
As the Senate wound down its 2013 session, Democratic leaders made a late push to extend many of the tax breaks by asking Republican colleagues to pass a package on the floor of the Senate without debate or amendments. Republicans objected, saying it wasn’t a serious offer, and the effort failed.
So should taxpayers count on these breaks as they plan their budgets for 2014?
“The best thing I would say is, budget accordingly,” said Jackie Perlman, principle tax research analyst at The Tax Institute at H&R Block. “As the saying goes, hope for the best but plan for the worst. Then if you get it, great, that’s a nice perk. But don’t count on it.”